What is Salam in Islamic Banking?
The Salam contract, often referred to as ‘Salam financing’ or “بيع سلم”, is a sale contract whereby the purchaser pays the price in advance and the delivery of the subject matter is postponed to a specified time in future”. Salam in Islamic banking may also be defined as: “A type of sale in which the seller undertakes to supply goods at a future date, against an advanced spot price, paid fully in cash”.
Comparison of Salam Contract with General Rules for Sale in Islam:
According to general Islamic Shariah rules, a sale must fulfill the following three conditions. However, only the Salam and Istisna are exceptional from these conditions:
- Commodity for sale must exist;
- The seller should acquire ownership of that commodity; and;
- The commodity must be in the physical or constructive possession of the seller.
Applications of Salam in Islamic Banking:
It is mostly a mode of finance for farmers and small traders. It is used by micro banks and financial institutions to support small industries. It is mostly used for:
- Agriculture financing;
- Working Capital Financing;
- Commercial and industrial financing;
- Export Financing; and;
- Operations and capital cost financing.
What is Parallel Salam?
After the execution of a Salam agreement with one party, the buyer or seller executes another contract with a third party. Parallel Salam contract is allowed with third party only. They must be two different and independent contracts, and these two contracts cannot be tied up.
Parallel Salam Example:
Let us understand it with the help of an example:
- Bank purchases 500 Bags of Rice from “Ali” through this contract, with full prepayment and to be delivered on June 30th.
- “Ali” delivers 500 bags of rice to the Bank on June 30th.
- Bank sells this commodity to a Third-Party, called a “Company” on credit.
- After taking its delivery on an agreed date, Bank delivers it to the “Company”.
- After taking delivery from Bank, the “Company” signs a promissory note against payment, on an agreed specified time.
This lecture is a part of Islamic banking courses and diploma Islamic banking and Islamic finance programs. AIMS’ curriculum includes all AAOIFI-compliant Islamic finance products and instruments, that are used by Islamic Financial Institutions.
Role of Salam and Parallel Salam Contracts:
These contracts offer Shariah Compliant financing mechanisms, especially in agriculture financing, to empower Shariah Compliant and Ethical financial solutions to Muslims and Non-Muslims, globally. They eliminate the prohibited elements, such as riba, gambling, and uncertainty, which are prohibited in Islam and against Islamic banking principles.